The Administration’s Defense of $550 Million in Amazon Employment Subsidies

Critics of Virginia’s deal with Amazon, Inc., have focused on the $550 million in job-creation subsidies as a grotesque example of corporate welfare, crony capitalism, or whatever you want to call it. I totally sympathize. The richest company in the world doesn’t need public subsidies. Moreover, given all the assets Virginia offered — a prime walkable-urbanism site in Washington’s metropolitan core, access to mass transit, one of the nation’s largest pools of high-tech labor, and a promise to invest billions building Virginia’s talent pipeline — some might think that Virginia didn’t need to give away so much money.

However, Stephen Moret, president of the Virginia Economic Development partnership and Virginia’s lead negotiator, argues that the subsidies were necessary to win the biggest economic-development deal in recent U.S. history. Amazon’s RFP made it as transparent as a Victoria’s Secret negligee that the company expected incentives to help it offset the up-front cost of its investment. States the RFP:

Incentives offered by the state/province and local communities to offset initial capital outlay and ongoing operational costs will be significant factors in the decision-making process. …

Identify incentive programs available for the Project at the state/province and local levels. And outline the type of incentive (i.e. land, site preparation, tax credits/exemptions, relocation grants, workforce grants, utility incentives/grants, permitting, and fee reductions) and the amount. The initial cost and ongoing cost of doing business are critical decision drivers.

Virginia’s goal in economic development projects like this is to reduce incentives to an absolute minimum — ideally zero, says Moret. But in this case, Virginia’s economic-development team knew it was competing with states who were willing to give away the store. New Jersey offered $5 billion to $7 billion in direct incentives.

It’s hard to gauge the competitiveness of other offers in Amazon’s site-location calculus, so state officials could do no more than make an educated guess as to how much Virginia needed to offer to snag the deal.

“You can never know the break point. The company always knows more than we do,” says Moret. “It’s hard to reverse-engineer their thinking.”

As a practical matter, Virginia had to put something on the table, Moret says. The state previously had agreed to provide $70 million to Micron Technology, Inc., to win a $3 billion, 1,100-employee expansion of its semiconductor facility in Manassas. “It would be hard to offer Amazon nothing after what we’ve done in the past.” On a dollars-per-job basis, Virginia’s incentives are less than what it provided other premier headquarters, such as Northrop Grumman, he adds. Given the state’s track record, to deny Amazon an incentive would have signaled that Virginia was not serious about the deal.

Another key point, says Moret, is that Virginia structured the deal to ensure that it is cash-flow positive for the state budget. Virginia makes the first incentive payment five years from now — long after Amazon begins hiring and generating tax revenue.

In past posts questioning the necessity of the subsidies, I have quoted Secretary of Finance Aubrey Layne as saying, “Incentives didn’t really drive the decision. At the end of the day, it was the workforce development and education pieces, which we already had decided were going to happen regardless.”

In an email, Layne provides context to that statement:

Even though [incentives] did not drive the deal, remember we wanted to have a real public/private partnership with Amazon. That requires “skin in the game” for both parties in order to show commitment to make the deal happen. We were very careful to make sure our direct incentives were payable only “after” Amazon incremental revenues are realized by the Commonwealth. We can debate the level of incentives, but on a per job basis they are moderate when compared to previous incentives.

You are correct, only Amazon knows their ultimate importance in their decision. I only know we are comfortable with how we structured our total incentive package. We believe it is good for Virginia and we have properly protected our taxpayers in relation to the upside benefits we expect for years to come.

7 responses to “The Administration’s Defense of $550 Million in Amazon Employment Subsidies”

I would suggest that our public servants in Richmond who envisioned, broadly designed then crafted this Amazon transaction, in the midst of selling it to Amazon and negotiating it at the same time, are not giving themselves the credit they deserve. That is wise, given the circumstances at play.

What do I mean by this. Very large complex commercial transactions grounded in a series of real estate plays do not happen in a vacuum. They are not created out of thin air. But the truly great ones can be obvious on their face at first glance, but most always they are still very difficult to do at all, and extremely hard to do right. But, if they are put together right, these deals generate on the own explosive power, bringing enormous benefit.

Surely this isl, and will be, the case with the Amazon transaction at Crystal City. Thus, for example, within minute after on Nov. 5 first learning of the rumor that Amazon might go to Crystal City, I wrote this in quick off hand reaction:

“Reed Fawell 3rd | November 5, 2018 at 12:36 pm | Reply

I-495 between the American Legion Bridge into Maryland and Tyson’s Corner, Va. has been called the most congested roadway in America, and rightly so.

On a much larger scale, however, the strip of shoreline running for a few miles from Alexandria City to Rosslyn, Virginia at the mouth of the Potomac Gorge, is likely the most congested, fragile and important transport corridor of riverside commuter access between a state and a city in the entire United States.

Within this narrow and highly confined strip of land one encounters, in addition to Alexandria City, traffic in and out of:

Crystal City – with some 76,000 daytime residents,
Reagan Airport – serving last year 23.9 million travelers annually,
Pentagon – world’s largest office building with 6.5 Million sq ft,
Rosslyn City – with 8.5 Million sq ft office, 6,700 housing units.
Behind Rosslyn is Ballston Rosslyn Corridor, Arlington’s new downtown.

Plus no less than 6 major Interstates or regional commuter arteries into and out of Washington DC, serving other regional urban areas, pass through this strip and over its many bridges across the Potomac.

For example, the great majority of all of N. Va. daily commuter traffic in and out of downtown Washington DC pass over the four bridges within this narrow and confined strip of land – namely the 14st Street Bridge, Memorial Bridge, Roosevelt Bridge, and Key Bridge, in addition to the ancillary Woodrow Wilson Bridge traffic on the far east end of Alexandria City.

How might it be possible to locate Amazon’s huge new 2nd HQ in Crystal City here in this already congested spot along the Potomac River with more Amazon employees than in the Pentagon a mile down the road? Not too mention, the housing for those new employees, and all the additional businesses and workers that such a 2nd HQ’s may attract?

At first glance, this seems an impossible choice, and a mad one, too.

On closer inspection, however, it seems to me a wonderful choice for all concerned. A choice that holds the potential to change the face of the entire Washington DC region for the better. One that could solve far more problems in the region that it might generate in the short term. Indeed this could be a truly inspired choice igniting a new era in DC, should Amazon decide to locate there in Crystal City and Potomac Yard. I hope it happens.

Caution – this “rumor” easily could be false, an intentional red herring to make a better deal elsewhere. Anything is possible. But surely the final choice is made in at least one person’s head, the only head that counts in the final choice. So things elsewhere, including just across the river in DC, are quite possible too. I say that knowing nothing about what’s really going on.

djrippert | November 5, 2018 at 1:54 pm | Reply

You’re right on all counts. It is nearly impossible. However, density cures dysfunction. Most people don’t drive to work in Manhattan because you can’t afford the tolls, the congestion or the parking. This forces the reality of an elaborate mass transit system on NYC.

Reed Fawell 3rd | November 5, 2018 at 2:37 pm | Reply

Yes, this puts Mr. Bezos in Catbird seat.

Imagine, he has now jumped right to the front of the line, looking across at the most powerful city in the world, while he sits next to Ronald Reagan Airport and the most powerful contractor and military force in the world at the Pentagon. All that gridlock into the Nations Capital is now firmly and forever behind Amazon, in the rear forever.

Plus to the east he can build his own smart growth smart town at Potomac Yard, big mixed uses for employees, subcontractors, military, and others. He also sits next to the historic old town of Alexandria, plus Mt Vernon, and Belle Haven, and Episcopal high school (The High School) and St. Stevens.

Plus, on the other side, to his west, he’s got the ultra hip Ballston – Rosslyn corridor, more great residential up the river over the gorge, and rehab and upgrade opportunities throughout Arlington County, a small jurisdiction he can get more control and get things done. This control is critical …

Thus there are ancillary commercial opportunities throughout Alexandria City, Arlington and northern Fairfax if Fairfax can get its act together, including residential and rehab up Shirley Highway, and Hybla Valley.

Most importantly, this deal will flip Northern Virginia right side up, put Fairfax County in its proper places, so it can get over its big boy complex, and do things the way they should have been done the first time around.

Finally, Mr. Bezos rejoins DC to Virginia shore via Potomac River, like commuter air boats and other waterworks, fulfilling George Washington’s dream, bringing his city functionally back together in a practical way, the way George had planned. Imagine a job fit for the most successful guy in the world today, Mr. Bezos, only he can pull off. How can he refuse?

djrippert | November 5, 2018 at 3:08 pm | Reply

Late breaking news … WSJ reports that Amazon will split its new HQ between 2 cities. Why stop playing one city off against another just because a decision has been made? ….

Reed Fawell 3rd | November 5, 2018 at 6:43 pm | Reply

I suspect that the two HQ2 strategy has a multitude of other advantages.

For example, let us assume the Crystal City locale is unique. Then downsizing it, to fully take advantage of its unique location, frees up the balance of the project so as to fit its secondary uses into far more practical location (s), whether this be one or more locations, at far less cost to Amazon, and fewer disruptions to existing communities. Thus, too, multiple locations for these secondary (non unique) uses may spin off a host of other advantages working in tandem, and provide far more flexibility of function and reach for Amazon. Perhaps, too, this was Amazon’s plan all along, or became obvious as the site location process exposed differing opportunities.

In any case, this would increase odds of a least half of deal going to Crystal City, as otherwise the primary political and functional concern of the Crystal City site would be how do we keep keep road access to DC open for long distance commuters from rest of Virginia.

I believe this traffic obstacle can be overcome readily with smart growth strategies deployed at Potomac yard alone for Crystal City, and elsewhere. You build this new mixed use development in ways that eats existing traffic and reduces new traffic by greatly shortening commuter traffic within the existing shoreline strip.

This new and existing traffic could also be significantly diluted by creative waterborne (even airborne) access across Potomac River and enhanced rail along the Virginia shore strip from Rosslyn to Alexandria, all of used for what now would be far more local traffic than long distance commute traffic. This same concept of replacing long distance commutes with local short distance commutes could also feed and revitalize other local nearby areas. Thus the whole area gets far more efficient and profitable uses with far less traffic. And everyone everywhere benefits cumulatively.” END OF INSERT

BUT STILL, despite all of this I missed perhaps the most important part of the transaction (the education part) plus much else besides.

But, seeing this in a flash, even all of this, does not begin to describe all the complicity, skill, talent, and brilliance that went into putting this deal together, negotiating in historic auction conditions, and despite that, landing it into the state of Virginia’s boat on extremely go terms. And the job has just begun.

Though out it all, Jeff Bezo’s set the table and played an absolutely brilliant hand. And your boys down there in Richmond danced his dance, while courting and countering him, every step of the way. I am deeply impressed. Virginia got a very, very good deal.

Jim’s post says: “But in this case, Virginia’s economic-development team knew it was competing with states who were willing to give away the store. New Jersey offered $5 billion to $7 billion in direct incentives.

It’s hard to gauge the competitiveness of other offers in Amazon’s site-location calculus, so state officials could do no more than make an educated guess as to how much Virginia needed to offer to snag the deal.”

But recall that Maryland’s offer for the Rockville site was leaked to the press last April, and very reliably reported to include $6.5 billion in tax incentives plus $2 billion in infrastructure and transportation improvements. This Montgomery County proposal remained in the top 20 until the end, and it was reported that the top Amazon search official had earlier worked for Montgomery County. The point is that all “serious” bidders were put under enormous pressure to put forth their best offer in this process.

So I speculated before that this is not a game that many (not all) Conservatives like to play and to be fair some among the critics are not Conservatives but if the Conservatives were in charge of this deal – Amazon would be elsewhere.

The ones that wanted it were going to play the game and not vacillate over “how much” they should proffer – they just gave a “competitive” proposal.

Conservatives types would have hemmed and hawed and worried that the incentives would look like “grotesque subsidies”!

This is why cities are blue and rural is red – not a 100% apple to apple equivalence but same church different pew.

Unless the Imperial Clown Show in Richmond or the Larcenous Locals of NoVa screw this up the Amazon deal will pay for itself a hundred times over. 25,000 employees making $150,000 each and paying 5% state income tax generates more than $550m in state revenue (i.e. taxes) in under 3 years.

Having made many acquisitions on behalf of companies where I was employed … I can guarantee you this – the deal (as hard as it may have seemed) will pale in comparison to the execution effort required to turn a deal into results.

Moret single-handedly ran the kickoff back to the 50 yard line. Team Virginia is in good position to score. But we certainly haven’t scored any points and “three and out” is the usual order of business in the Old Dominion.

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